Buyers who rely on imported semi-finished or finished components will no doubt cheer the recent drop in freight rates. In fact, global logistics costs will peak at the end of 2022.Now, buyers will soon see The ocean freight frenzy triggered by the new crown epidemic hit a record high. Indeed, few will shed tears to learn that many shipping lines continue to struggle with below-cost container spot rates. They might even see it as “payback” for the huge profits they’ve made over the past three years. However, with freight rates on many routes even lower than pre-pandemic levels, this generous approach is unlikely to last.
Freight rates on the transpacific Asia-US route have rebounded in the second quarter. This month, they’ve seen double-digit percentage increases, although those increases are admittedly from a low base. Volume also increased slightly.Still, most of the improvement happened with the shift of production lines It launched capacity on the Europe-North America route earlier this year. More recently, the companies have also started canceling flights to manage excess capacity.
These efforts have been successful so far. In fact, reports suggest that companies are rolling cargo as container rates approach the route’s breakeven point. Trans-Pacific routes to eastern U.S. ports also face restrictions due to the construction of the Panama Canal, further boosting rates.
Global logistics could bounce back under the right conditions
Conversely, rates on the transatlantic Europe-North America route were affected due to the strength of the Pacific route. Overcapacity intensifies as ships switch from the latter to the former. Prices from Rotterdam to New York in early November were nearly $7,500 per 40-foot unit. Last week, however, prices fell to $1,577 per 40-foot unit. Shipping lines initially shifted vessels as rates in the North Atlantic remained stable after the COVID-19 boom ended. Nonetheless, excess capacity and a slow recovery in Europe has led to excess space. This, in turn, leads to lower spot and contract prices.
The delivery of new ships will only exacerbate the situation, adding to global logistics capacity amid falling demand. By mid-August, the rate was half what it was before the pandemic. Although the line continues to reduce capacity this summer, it will take time for freight rates to recover. Currently, contract rates exceed spot rates, and shipping lines may need to renegotiate contract rates in the medium term to maintain volume. Ultimately, shippers should anticipate a prolonged period of reduced service, flight cancellations and disruptions as routes adopt a more aggressive approach to capacity management.
Upturn on Pacific routes
Rates on Pacific routes are likely to continue to recover as airlines stick to aggressive capacity management plans. While they may not be able to reach the freight rate levels seen during the pandemic, the trough has passed and the trajectory for further recovery appears feasible. The only caveat is the scheduled delivery of new ships in 2024. In fact, this will require strict management by shipping companies, who will have to withdraw older vessels to prevent a near-term decline in earnings.
Meanwhile, Europe-US Atlantic markets remain weak and rates are likely to remain low in the fourth quarter. That’s enough to cause anxiety in the hearts of procurement professionals across the country. However, there are signs of recovery here as well, as various capacity management efforts on the production line have started to bear fruit. Contract rates in the final months of 2024 may be more sensible for shippers than in 2023, when contract rates have been losing ground to the spot market.
Editor’s note: Summary points for this article were selected by the Seeking Alpha editors.